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THE OMBUDSPERSON:  2016 AMENDMENTS AND UPDATE

On August 12, 2016 Governor Rauner signed Public Act 99-0776 which makes several significant changes to the original Ombudsperson Act.  This article will provide quick highlights of certain changes contained in P.A. 99-0776.

Registration of Community Associations

Critical to all associations, the requirement that all common interest communities and condominium associations register with the Department of Financial and Professional Regulations has been removed.  No registration is required.

Association Internal Dispute Resolution Policies

All associations subject to the Condominium Property Act and the Common Interest Community Association Act must adopt their own policies for resolving complaints made by owners no later than January 1, 2019.  The original bill required the policies to be in place by January 1, 2017 so associations have been afforded two additional years to develop these policies.  The Act current provides that these policies must include a form on which an owner may make the complaint, a description of the process by which the complaint must be submitted, the timeline in which the Association will resolve the complaint, and the requirement that the Association make its “final” decision within 180 days.

The Current Role of the Ombudsperson

No later than July 1, 2017, the ombudsperson is to begin offering training, outreach and educational materials to the public and it may also offer courses related to the management and operation of community associations, the Condominium Property Act and the Common Interest Community Association Act.  The ombudsperson is to also offer a toll-free number for contact and inquiry purposes in addition to providing information regarding alternative dispute resolution providers (arbitrators, mediators) and methods available to communities and their members.  The ombudsperson does not have authority to consider any matters involving claims under the Illinois Human Rights Act or that are properly brought before the Department of Human Rights or the Illinois Human Rights Commission.  The amendments to the Act provide that certain information reported to the Ombudsperson is not be subject to certain Freedom of Information Act requests.

Reporting to the General Assembly

The Department of Financial and Professional Regulation is required to provide its first written report of the ombudsperson’s activities to the General Assembly no later than July 1, 2018 and beginning in 2019, annual reports of the office’s activity are to be filed no later than October 1st. It is expected that the General Assembly and administration will use these reports to evaluate the proper, future role of the ombudsperson.

IT’S NEVER A BAD TIME TO REVIEW YOUR DELINQUENCIES

With the budgeting and annual meeting season in the rear-view mirror and with the opening of pool season still a couple of months away, now is the time to review your association’s assessment delinquencies.  There’s never a bad time to review delinquencies, but this is a particularly good time to determine if the owners are all carrying their fair share of the common expense.  I have never understood the thought that any percentage of owners who don’t pay as being acceptable or expected.  Setting an acceptable percentage of 10 or 10% of owners who are delinquent is really an arbitrary action.  Why should 20% of the owners be allowed to not pay their fair share?  The perfect storm of a mortgage foreclosure action coupled with a bankruptcy discharge could ultimately render an owner’s debt uncollectable, but absent the confluence of these events, very few delinquencies are uncollectable.

Recent Illinois Supreme Court decisions in Spanish Court Two and 1010 Lake Shore have recognized and respected condominium association lien rights.  Associations need to take advantage of the myriad of tools available to collect delinquent assessments.  Actions for possession under the Forcible Entry and Detainer Act, lien foreclosure and small claims actions all provide great opportunity to make associations whole.  While the landscape of community association governance has changed substantially over the past few years, one truth remains:  Diligent and aggressive assessment collection is a necessity.  Collection of assessments is the foundation of a board’s fiduciary obligation.  Associations cannot function properly when not fully funded.  In the competitive residential real estate market in which we now find ourselves, buyers are becoming more discriminating.  The financial health of a community is a much more substantial factor in determining whether a particular unit is desirable for purchase.  If a prospective owner has the choice between purchasing a unit in a well-funded community as opposed to one with substantial delinquencies and a looming large special assessment, what decision will this individual likely make?

Boards and management should not struggle with assessment collection.  A comprehensive assessment collection policy that affords the association’s counsel the opportunity to move files diligently without the need to constantly consult with the client will result in a greater success rate on delinquent files.  Regular reviews of an association’s delinquencies is also a must.  Boards and management should be reviewing their delinquencies minimally on a quarterly basis.  Our office also welcomes the opportunity to assist boards and management in reviewing delinquencies and making recommendations as to which accounts should be pursued and whether any debts should be written-off as uncollectable.  The jobs of board members and managers are complicated enough without having to be deeply engaged in the assessment collection process.  Utilize your professionals and allow your attorneys to take this important element of managing an association off your plate.  Don’t ignore your delinquencies.  The law provides great opportunity to minimize and eliminate them.

 

This article is being provided for informational purposes only.  This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys.  No association, board member or any other individual or entity should rely on this article as a basis for any action or actions.  If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.

On December 3rd, the Illinois Supreme Court issued an opinion confirming the holding of the First District Appellate Court in the case of 1010 Lake Shore Association vs. Deutsche Bank National Trust Company. If you are reading this article, you probably know the facts of this case already. If not, in a nutshell, the case involved a foreclosed unit at 1010 Lake Shore that Deutsche Bank purchased at a foreclosure auction. The foreclosed-out owner owed a substantial balance to the Association at the time the foreclosure sale took place. Upon taking ownership of the unit, Deutsche Bank failed to pay any assessments. The Association ultimately sued Deutsche Bank in circuit court and the court entered judgment against Deutsche Bank for the pre-foreclosure balance. Deutsche Bank appealed the circuit court’s ruling and on appeal the First District Appellate Court held and the Illinois Supreme Court subsequently confirmed that under Section 9(g)(3) of the Illinois Condominium Property Act, a foreclosure purchaser must pay common expenses beginning the month after the sale. The Appellate Court and Supreme Court also held that if a foreclosure purchaser fails to pay assessments beginning the month after the foreclosure sale, the association’s lien for common expenses not paid by the foreclosed-out owner is not extinguished and the foreclosure purchaser then becomes obligated to pay the entire pre-foreclosure balance.

What does this mean for condominium associations and how should associations and management handle unpaid balances on foreclosed units?

  • Actively monitoring foreclosures continues to be important. Those associations that work with our office know how frequently we track foreclosure cases for our clients. We have consistently advised our clients the importance of knowing the status of pending foreclosure actions. The holding in this case makes knowing whether a unit has recently been sold at foreclosure auction more critical than ever as not being on top of the status of a sold unit could result in an association losing out on its right to collect pre-foreclosure amounts.
  • Don’t write off balances. Writing off a pre-foreclosure balance without consulting with counsel could result in an association walking away from money it is legally entitled to recover.
  • If the purchaser of a unit at foreclosure (a lending institution, a quasi-governmental agency, or a third-party investor) fails to timely pay the assessment due the month after the foreclosure sale is conducted, turn the account over to association counsel for collection. Do not wait 60, 90 or 120 days after confirmation of the foreclosure sale to turn the account over if there is a pre-foreclosure balance and the new owner has not paid any post-foreclosure assessments.
  • Once an account has been turned over to counsel for collection, do not accept any payments without first discussing the matter with counsel. Accepting a payment will most likely preclude an association from collecting any portion of the pre-foreclosure balance.
  • It does not matter if an association has been included as a defendant in a foreclosure action. The obligation to promptly pay post-foreclosure assessments applies to all foreclosure actions, whether the association has been named as a defendant or not. Further, the Supreme Court also appeared to state that if an association is not named as a defendant in the foreclosure action, the association’s lien is not extinguished even if post-foreclosure assessments are paid.

Because Deutsche Bank did not pay any post-foreclosure assessments, the Supreme Court did not address the timing of when a foreclosure purchasers’ ability to extinguish the pre-foreclosure lien by paying the post-foreclosure assessments expires. The only statement the Supreme Court made on the issue is Section 9(g)(3) “provides an incentive for prompt payment,” but it did not include any definition of what “prompt” means. Therefore, the Court did not impose any set deadline for payment. Accepting a payment, regardless of when the payment is made, most likely eliminates an association’s ability to collect the pre-foreclosure balance. Without any additional guidance from the Court, the best recommendation we can make is to be aggressive in turning accounts over post-foreclosure if the accounts have a pre-foreclosure balance and once accounts are turned over for collection, do not accept any payments.

While the General Assembly has not been responsive to efforts made by those who advocate on behalf of condominium associations to afford some additional relief related to the loss of assessment revenue that usually accompanies a foreclosure, the Illinois Supreme Court has unanimously recognized the obligation of foreclosure purchasers to promptly make payments upon taking ownership of units. If a foreclosure purchaser fails to promptly make post-foreclosure assessment payments and if an association acts diligently, it will put itself in position to recover pre-foreclosure amounts it may have believed were lost once ownership of the unit transferred.

Senate Bill 1374 Signed Into Law: Developers’ Loophole Closed

On July 14, 2015, Governor Rauner signed Senate Bill 1374 (Public Act 99-0041), which was sponsored by Senator Mike Hastings and Representative Kelly Burke, and authored by Douglas Sury of Keay & Costello, P.C., as a member of the Association of Condominium, Townhouse and Homeowners Association’s (ACTHA) Legislative Action Committee. The bill closed a loophole that was being exploited by developers when establishing non-condominium communities. Over the past couple of years, Doug had seen a number of new townhome communities formed by developers not as not-for-profit corporations, but rather as limited liability companies. Forming associations as limited liability companies allowed developers to avoid subjecting their communities to the governance of the Common Interest Community Association Act (CICAA) and the mandatory turnover provisions found within Section 1-50(b). A plain reading of CICAA appears to only subject communities formed as not-for-profit corporations to its governance. Since the newly formed communities were not subject to CICAA, a developer could record a declaration that allowed it to retain control of the board and the association’s finances for whatever time period it deemed appropriate. That is no longer the case, as now associations formed as not-for-profit corporations and limited liability companies are subject to CICAA and its mandatory turnover provisions. In addition to amending CICAA, Senate Bill 1374 amended portions of the Forcible Entry and Detainer Act to clarify that common interest communities formed as limited liability companies may use the Forcible Act to collect unpaid assessments.

Public Act 99-0041 is effective immediately and a link to the entirety of the Public Act is below. Doug would like to extend his thanks to Senator Hastings, Representative Burke, ACTHA, ACTHA’s lobbyist John Carr and the Illinois Chapter of CAI for their hard work and support of this bill that will have a significant impact for all newly-formed common interest communities.

 http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=099-0041

 

IT’S JULY, DO YOU KNOW IF YOUR INSURANCE COMPLIES WITH ILLINOIS LAW?

As of June 1, 2015, all condominium associations were required to have insurance consistent with recent changes to Section 12 of the Condominium Property Act. Public Act 98-0762, which was signed by former Governor Quinn on July 16, 2014, became law June 1, 2015 and it modified certain insurance requirements for condominium associations. Note that this Public Act modified only condominium insurance requirements. Common interest communities, master associations and cooperatives were not impacted by this Public Act. The changes to Section 12 of the Condominium Property Act can be summarized as follows:

Property Insurance

Property insurance maintained by the association upon the common elements and units must now also include coverage not only for the full replacement cost of the insured property, but also coverage sufficient to rebuild the property in compliance with current municipal codes and ordinances in effect at the time of rebuild (“ordinance coverage”)

  • An association’s property insurance policy must provide coverage for all costs of demolition and increased costs of construction
  • The combined total coverage for costs of demolition and increased costs of construction must be either 10% of each insured building’s value or $500,000, whichever is less
  • If an association’s property insurance covers betterments and improvements within the units, the policy now also insures any additions, alterations or upgrades installed or purchased by the unit owners

Directors & Officers Coverage

All D & O policies must now cover claims that seek non-monetary relief (i.e. suits for injunctive relief, declaratory actions) and breach of contract actions

  • The D & O policy provides coverage to all currently-serving board members in addition to former and future board members
  • The managing agent, the managing agent’s employees and any employees of the board must be covered under the association’s D & O policy

Public Act 98-0762 also removed the statutory authority of a condominium association to purchase insurance on behalf of an owner who fails to do so. This is a codification of what many have found over the years to be a commercial impossibility. Insurers have been unwilling to write these policies for associations often citing the lack of an insurable interest. As a result, if an association has a governing document provision requiring unit owner insurance and should an owner fail to maintain the coverage, the board’s only option compel purchase of the required insurance is to file an action in circuit court.

If an association has not done so already, it should consult with its insurance professional to verify its coverage is in compliance with the recent changes to Illinois law. There is no exception that allows a board to wait until renewal to come into compliance and only policies that are consistent with the current language of Section 12 of the Condominium Property Act may be written by insurers or renewed by associations.

 

SUMMER FUN AT THE COMMUNITY POOL: DO WE REALLY NEED TO THINK ABOUT THE FAIR HOUSING ACT?

Spring is finally here and Memorial Day, the unofficial kick-off to summer, is just around the corner. The lead up to Memorial Day usually means two things for community associations: 1.Time to get the pool ready, and 2. Owners who would like to be able to use the pool this summer will find a way to pay their assessments. As the pool season approaches, a discussion of the current state of the Fair Housing Act and the Fair Housing Amendments Act of 1998 is important as these statutes directly impact how an association may regulate the use of its pool and other clubhouse facilities.

The Federal Fair Housing Act prohibits discrimination in connection with residential dwellings against individuals on the basis of their race, color, sex and national origin. The Fair Housing Amendments Act of 1988 went further, and prohibited discrimination on the basis of handicap and familial status. Many of the Fair Housing provisions do not apply to community associations, but community associations are subject to the jurisdiction of the Fair Housing statues to the extent the statutes prohibit discrimination in the provision of services or facilities with respect to residential dwellings. It is this language that subjects community association common areas, clubhouses and swimming pools to Fair Housing governance.

Communities must be aware that appellate courts that have been asked to decide Fair Housing cases challenging the validity of pool rules have found that the following commonly-adopted rules violate the Act:

• Adult-only swim times
• Restricting children to one pool when a community may have more than one pool
• Age restrictions for gaining entry to, and use of, a pool
• Requiring supervision of swimmers under a certain age
• Requiring children under a certain age be accompanied by a parent or guardian

If a community has adopted any of the above rules, or if a community has adopted comprehensive rules relating to the use its common areas and facilities, it should seek an opinion from its attorney as to their validity and enforceability in light of the Fair Housing laws. These statutes are being construed liberally by appellate courts across the country and a community does not want to find itself engaged in federal litigation over its pool rules. Not only is such litigation extremely time consuming, the potential penalties for engaging in a discriminatory practice, whether intentional or unintentional, can be substantial.

For those of you who live in a condominium, townhome or single family community association that was built during the last development boom, you may find that where you now live doesn’t look exactly as you expected it to when you first made your decision to buy. Vacant lots, unfinished units, foundations poured (but no home built), are all scenarios that many who live in a community association now find themselves. While none of the foregoing are an ideal living situation, at least we can all relax knowing that the builder/developer of the community, who no one liked anyway and went bankrupt or was foreclosed out of any property that it may have owned, will never come back, right? As Yogi Berra once said, “It ain’t over ‘til it’s over.” Some unfinished communities are now finding that rumors of a rebound in the residential real estate market are not exaggerated as new investors are purchasing vacant lots or unfinished units with the intention of completing construction. In some cases, the purchaser of the unfinished lots/units is a builder that is new to the community, in others the same builder who didn’t complete the project the first time around is back, just with a different name. In either case, communities must brace for the headaches and disturbances created by construction activity. Beyond the disruption to the peace and quiet, owners may notice the new (or old) builder engaging in activities that violate the association’s declaration. What rights does this new (or old) builder have? What rights do the owners and the association possess? Is this new builder going to run its operations with an iron fist like Mike Ditka or with kindness like Love Smith and what will this mean for the owners? The following provides a general description of the role of declarant, declarant rights, and the relationship between a party holding declarant’s rights and an association that has already been turned over to the owners.

Who or What is the Declarant?

The declarant is the owner of a property that becomes the condominium/common interest community. The declarant gives life to the condominium or common interest community by recording a declaration against the property that will ultimately comprise the association. The declarant is also the party that forms the not-for-profit corporation that will become the association. As the entity that most likely owns the entire tract of property upon which the association will ultimately be located, the declarant is vested with a great deal of authority to establish all of the covenants and restrictions under which the future owners will be expected to live. Along with the ability to establish total association governance, the declarant can create certain exceptions to the covenants, often favoring itself. These exceptions are referred to as declarant’s rights.

What Are Declarant’s Rights?

The reserved rights of the declarant are found within an association’s declaration. While not necessarily an exhaustive list of all possible declarant’s rights, the following are typical rights reserved by the declarant:

  1. Promotion: This allows the declarant to maintain model homes, a sales office within an existing building or unit, construct a temporary building for housing of a sales office and erect advertising or signage promoting the project and the sale of units;
  2. Construction: This allows the declarant to make alterations, additions or improvements to the property that it deems necessary or advisable for the project. This often includes landscaping and the storage of construction equipment and materials upon the property, without the payment of any fee;
  3. Easement and dedication: Easement rights allow the declarant to provide access to the property to any governmental authority, public or other utilities serving any lot or unit. Dedication rights allow the declarant to dedicate or transfer portions of an association’s common area to a county, municipality or other governmental authority that has jurisdiction over the property;
  4. Architectural control: This allows the declarant to formulate and bind all of the owners to certain standards governing the appearance of units/homes and the community as a whole;
  5. Amendment: In addition to possessing the authority to add property to the development, declarants typically have the unilateral ability to amend an association’s governing documents. In addition, any amendments the membership wishes to pass are also typically required to be approved by the declarant. If the declarant does not agree and its approval is needed, an amendment to the association’s governing documents will fail;
  6. Assessment payment exemption: Most declarations include an assessment payment exemption for the declarant. Often the obligation to pay assessments for a particular unit or lot does not commence until the declarant sells to a third party;
  7. Assignment: The right to assign allows the declarant to transfer to a third party all or some of the rights granted in the declaration. There will be a discussion of this right later in this article.

How Long Do Declarant’s Rights Exist?

Declarant’s rights cannot be asserted forever. However, they can survive turnover of the association to the owners. While there is no state law governing how long declarant’s rights may be asserted, most declarations provide that these rights may be exercised as long as the declarant holds or controls title to any portion of the development. For a condominium association, if the declarant still owns single unit, declarant’s rights remain. For a common interest community, if the declarant owns any lots upon which homes may be constructed or any portion of the common areas, declarant’s rights may be exercised.

When Can Declarant’s Rights Be Assigned and What Is the Impact of an Assignment?

Absent contrary language in an association’s declaration, declarant’s rights are freely assignable. This means declarant’s rights can be transferred between parties without association approval. The declarant can transfer its rights from one corporation to another related or unrelated corporation, to an individual or to its lender. The ability to assign declarant’s rights is often not tied to the original declarant maintaining an interest in the development. This means that even if the original declarant no longer owns any property in the development, if it is currently under bankruptcy protection, has completed bankruptcy, or has otherwise gone out of business, it may still assign its rights to a third party. An assignment of declarant’s rights allows the new builder to step into the shoes of the original builder and assert those same rights described above.

What Should an Association Do If the New Builder has Been Assigned Declarant’s Rights?

If an association finds that another builder is asserting declarant’s rights, the first thing it should do is ask to see the assignment. An assignment can only be accomplished through a written instrument. If the new builder cannot produce this document, it most likely does not have declarant’s rights and it should not be permitted to assert them. If a valid assignment is produced, the association must first understand that contacting its legal team in an attempt to mount a legal challenge to the new builder’s assertion of declarant’s rights would most likely be unsuccessful. Since a legal attack is not a good option, the board and owners should shift their collective focus to working with and establishing a relationship with the new builder. This can be difficult if the “new” builder is really the old builder, just with a different name, but the interests of the association and the new builder are not necessarily always at odds. Even if “Otis Wilson Builders” has returned to the scene as “Mamma’s Boy Construction,” the builder wants to provide attractive homes for sale, fast. The association wants its neighborhood completed and more homes paying assessments. While the new builder armed within assignment of rights can assert more control over the community than the owners would like, it will still have to work within the confines of the association’s declaration, not to mention any annexation or planned unit development agreements that may be on fi le with the municipality and which were created at the time of initial construction.

If an association finds that the builder is seeking to construct homes that look substantially different from what was previously constructed and the builder produces a valid assignment of declarant’s rights, unless the association’s declaration contains architectural controls regulating the exterior appearance of homes that are being ignored, a legal challenge is once again not the best response. Keep the lines of communication open with the builder and express the association’s concerns. A builder just wants to construct and sell homes. It does not want to be bogged down with association-related issues. To that end, open communication in an effort to tackle problems early in the process will benefit both parties.

If the builder is not as receptive to the association’s concerns, any changes in the appearance of homes that deviates from the annexation or planned unit development agreements must be approved by the appropriate municipal authorities (zoning board, plan commission, village board, etc.). It is during these municipal proceedings that any objections to the new builder’s plans should be voiced as they provide the association’s best chances of impacting what is ultimately constructed and the appearance of the community upon completion.

Fiduciary Obligation to Collect Assessments, Use of the Forcible Entry and Detainer Act and its Impact upon Associations

While few take pleasure in pursuing their neighbors, friends, colleagues, etc. for the collection of assessments, associations and their duly elected board members are charged with the duty of doing just that. By volunteering to become a board member of your association, you are submitting yourself to be held to a high legal standard; the standard of being a fiduciary. Individuals who fill fiduciary capacities such as attorneys, accountants and association board members are charged with the highest, most stringent duties under the law.

A fiduciary must always put the interest of his or her constituency above his or her own interests and must always make decisions based upon what he or she believes is in the best interest of the community as a whole, not just a select few. Playing favorites is not an option. To that end, making decisions in a fiduciary capacity requires difficult and sometimes uncomfortable or unpopular decisions. One such decision charged to all board members in the State of Illinois is how and when to pursue a delinquent owner for past due assessments. The balance of the community, those owners who pay their assessments in a timely fashion, must have the trust and faith in their board members that the association is not asking them to carry the load for those who choose not to pay. Thankfully, in the State of Illinois, associations have an option for the collection of assessments that is superior to all others, and when used will reduce an association’s overall delinquency rate, the Forcible Entry and Detainer Act.

Forcible Entry and Detainer

Associations in Illinois may use the Forcible Entry and Detainer Act, or the “eviction statute” to collect delinquent assessments. Associations using the Forcible Act to collect assessments initiate collection by the service of a 30-day demand letter. The 30-day demand letter must be sent, by certified mail, to the owner at the unit, or to the owner’s off-site address, if an off-site address has been provided. The owner does not need to pick-up or sign for the 30-day demand letter. As long as the association is able to demonstrate that the demand letter was sent by certified mail to either the unit or the off-site address, no further notice is required and the owner has 30 days from the date of the letter to pay the delinquency. If the owner brings the account current within the 30 days, no further action can be taken. However, if the owner fails to pay any amount or if the owner makes a partial payment within 30 days, the Association is vested with the authority to file an eviction action against the owner in an attempt to collect all past due amounts.

If suit is filed under the Forcible Act the association will be asking a court to award it all past due assessments, attorney’s fees and court costs. Additionally, the association will be asking a court to award it possession of the owner’s unit, i.e. to evict the owner for non-payment. If an owner does not pay his or her share of the assessments and if the association is awarded possession of the unit, the owner will be afforded between 60 and 180 days, as fixed by the court, to pay the delinquency from the date of judgment (known as the “stay” period). After expiration of stay, if the owner has not cured the delinquency, the association is authorized to schedule an eviction with the county sheriff. If an eviction is completed, the owner loses the right to live in the unit, but not ownership of the unit. At this point the association can place a renter in the unit and apply all rental payments received toward the owner’s past due balance. In addition to the past due assessments, attorney’s fees, late fees and court costs, the costs incurred in making the unit rentable, such as repair costs and broker’s fees may also be recouped through rental payments. Keep in mind that leases with tenants are not unlimited in time and once the delinquency has been paid, the owner has the right to petition the court to regain possession the unit.

The Impact upon the Association

As you would expect, the number of completed evictions is relatively small in relation to the total number of cases filed to collect past due assessments. The possibility of losing the right to live in the owner’s home provides a great incentive for the delinquent owner to become current. If however, an owner does not pay and an eviction is completed, the impact upon an association as a whole can also be substantial, in a positive way. Once owners realize that the obligation to pay assessments is real and that the association’s rights to compel payment are substantial, the incentive to avoid the embarrassment of an eviction takes over. The end result of using the Forcible Act is often a reduction in an association’s overall delinquency rate and an association budget that on an annual basis sees no increase or a minimal increase in the owners’ assessment obligation.

Question: How does a trust effect the ownership of a unit? Who represents the unit when

  1. the trust has not yet been settled and
  2. there are multiple heirs?

First, not all trust agreements are the same. There are land trusts, which are vehicles used by owners to keep their personal interest in the property private. In a typical land trust, all of the rights, powers and duties associated with ownership of the property remain in the hands of the beneficiary or beneficiaries of the trust, which includes all obligations and rights set forth in an association’s governing documents.

The other, more familiar trust arrangements are living (“inter vivos”) trusts and testamentary trusts. A living trust is executed and of legal effect during the life of the individual that settles or establishes the trust agreement. A testamentary trust is a document created during the settlor’s (maker’s) life, but that is of no legal effect until that person dies. It is important to understand that there is no single rule concerning trust agreements and control of trust property. Each trust is distinct and must be taken on an individual basis. However, generally speaking, with a living or testamentary trust, the trustee is vested with the authority to deal with all aspects of the trust, including the assets that make up the trust. Accordingly, the trustee, as the individual charged with the legal obligation to deal with and make decisions concerning the trust and any trust assets, would be in the position to advise the association who will be casting votes on behalf of the unit, etc. However, until a trust agreement is “settled” or executed, it is of no effect. The trust only becomes the owner of records for the unit and only has the authority to act on behalf of trust beneficiaries upon execution of the trust document by the settlor or maker of the trust.

RULES AND REGULATIONS:
HOW ARE THEY CREATED? HOW ARE THEY ENFORCED?

I. What are they?

While the adoption of rules and regulations is not required of any community association in Illinois, most find it advantageous to do so. As compared to the declaration, which creates/establishes the condominium or common interest community, and the bylaws, which deal primarily with the obligations and duties of the board and governance of the community, the rules and regulations provide an opportunity to govern the details, operation and day-to-day living at the entire property.

II. How do rules and regulations differ from the declaration and bylaws?

A. Declaration

With respect to condominium associations, Section 4 of the Illinois Condominium Property Act (the “ICPA”) requires that certain provisions be included in each condominium declaration. Some of these provisions are:

a. the legal description of the property;
b. legal description of each unit;
c. the name of the condominium association;
d. the name of the city and county in which the condominium is located;
e. the percentage of ownership in the common elements assigned to each unit, and;
f. a description of the common and limited common elements. (765 ILCS 605/4)

The declaration for each an association must also be recorded in the county in which the community is located. The recording of the declaration informs the public that the common interest community has been created and that all property within the community is subject to its provisions, covenants and restrictions.

B. Bylaws.

The Illinois Condominium Property Act sets forth certain provisions that must be included in each set of bylaws for condominium associations. Some of these provisions are:

a. the procedures for the election of a board of managers;
b. the powers and duties of the board;
c. the mechanism for removal of board members;
d. notice requirements to the owners regarding adoption of the association’s annual budget;
e. the mechanism for filling vacancies on the board;
f. maintenance, repair and replacement of the common elements and the method of payment therefore, and;
g. the mechanism for calling special meetings

The bylaws for an association prescribe the operations and dealings of the board, which is the governing authority for the community. The bylaws also play an important role by establishing the rules for payments made in conjunction with the maintenance, repair and replacement of the common elements.

C. Rules and Regulations.

Unlike the declaration and bylaws, an association’s rules and regulations are not required to include any particular provisions. As stated in the introduction, there is no requirement that an association, be it condominium, townhome or other, adopt rules and regulations at all. But there are a number of day-to-day concerns of individual owners, and the community as a whole, that are not typically included in declarations and/or bylaws and must therefore be addressed and codified in a separate document. That document is a set of rules and regulations.

III. What types of provisions are appropriate for inclusion in a set of rules and regulations?

The specific needs and concerns of a community truly dictate what provisions would be appropriately included in a set of rules and regulations. For illustrative purposes, the following areas of concern are routinely addressed by way of rule:

A. parking;
B. storage of personal items;
C. exterior appearance of units/homes (architectural controls);
D. disposal of refuse;
E. use and enjoyment of common areas;
F. appearance and use of limited common areas;
G. landscaping on individual lots;
H. use and storage of play equipment;
I. pets, and;
J. satellite dishes/over-the-air reception devices.

IV. Procedures and considerations for creating, adopting and enforcing rules and regulations.

A. Creation.

One of the first questions a community should ask, and answer, prior to adopting certain rules is whether or not the proposed rule is necessary. If the item of concern is already addressed in either the association’s declaration or bylaws, the additional rule may be superfluous. Further, if the declaration and/or bylaws specifically address the issue at hand, the association may not change the language contained in the declaration and/or bylaws by adopting a rule. Any rule that is contrary or in conflict with a similar provision in the declaration and/or bylaws will be invalid and unenforceable. The only way to modify, alter or overturn a provision in the declaration and/or bylaws is to amend that specific document. The declaration and/or bylaws may not be amended, modified or rescinded by passage of a rule. If, however, the declaration and/or bylaws contain no provisions addressing the association’s specific concern, adopting a rule to govern the desired conduct is appropriate. Lastly, the rule adopted by the community may not conflict with statutory law.

Other than determining whether a proposed rule conflicts with the law or the association’s declaration and/or bylaws, the most important consideration when drafting a rule is to avoid vagueness. If an owner does not know what he or she is permitted or prohibited from doing, the association will have a difficult time enforcing the rule. Therefore, all rules should be drafted as narrowly as possible to avoid any “gray areas” or confusion.

B. Adoption.

For common interest communities, there are no specific statutory procedures to be followed for adopting rules and regulations. For those communities, the declaration and bylaws must be consulted to determine the appropriate process. Should the governing documents be silent, the discussion below with respect to condominium associations and the procedures to be employed would be appropriate for all such communities. The procedures for adoption are significant as if an owner challenges a rule, a court will be called upon to determine: 1) whether the rule is enforceable and 2) whether the owner violated the rule. The association must follow its own procedures established by its governing documents or, for condominium associations, those procedures established by the ICPA. Should those procedures not be followed, then the rule is not likely to be enforceable. Attention to procedure is of critical importance to assure the enforceability of an association’s rules.

For a condominium association, section 18.4 of the ICPA governs the procedures condominium associations must employ when seeking to adopt or amend rules and regulations. First, once the board has developed the rule or rules it seeks to adopt, the same should be prepared in written form, suitable for distribution to the owners. Section 18.4(h) of the ICPA requires that all owners be given the full text of the proposed rules along with the notice of the meeting at which discussion of the rules will take place. Notice of such a meeting, which must include a copy of the full text of the proposed rule or rules, is to be delivered to the owners not more than 30 and not less than 10 days prior to its scheduled date. Voting on whether to adopt or amend rules and regulations is within the specific purview of the board. Once the meeting to discuss the rules has been held, the board, by majority vote, will determine whether the rules are adopted.

C. Enforcement.

The two concepts that all communities seeking to enforce its rules and regulations must be cognizant of are uniformity and reasonableness. It is imperative that an association, when enforcing a specific rule, does so equally and without prejudice as to all owners. This is true whether an owner is delinquent in his or her assessment payments, is a chronic violator of the rules, or is one of your friends. All owners must be viewed and treated the same when evaluating a violation of the rules and regulations.

As for reasonableness, this is a difficult concept to define. How can a board make a determination as to whether a rule or regulation is reasonable? Obviously, there can be a myriad of opinions as to what rules an association should enact. Since a true and complete consensus on most rules is most likely unattainable, finding some common ground is the goal. If the association can develop a rule or set of rules that a majority of the owners can live with, while perhaps not agreeing with the specifics of each rule, that association is probably acting “reasonably.” When an association’s rules and regulations reflect that certain compromises and concessions concerning personal tastes and preferences must be made when living in a common interest community, reasonableness has probably been achieved.

a. Notices of violation.

It may seem obvious, but it is important to remember that an owner cannot be determined to have violated a rule without first being notified of the violation. While no specific form of notice is required, the owner should be informed of the rule he or she has allegedly violated, along with the time, date and location of the violation. The notice should also set forth whether the alleged violation is the first, second, etc. occurrence and the fine that could be levied in the event the board determines that the violation did in fact occur. The notice should also afford the owner an opportunity to request a hearing with the board. The association can handle this in a couple of different ways. First, the notice can set forth a specific date and time at which the owner is welcome to appear before the board and present facts supporting her contention that the violation did not occur or why any fine to be levied in conjunction with the violation is inappropriate. Alternatively, the association can merely inform the owner that he or she has the right to request a hearing before the board by notifying the association in writing of the request. As my discussion below will establish, the failure to provide an owner the opportunity for a hearing (i.e. some form of due process) prior to levying a fine could invalidate any such fine levied by the association. Section 18.4 (l) of the ICPA and Section 1-30 (g) of the CICAA require an association provide the owner with an opportunity to be heard. This means the hearing (or at least the opportunity) must come before the fine.

b. Hearing.

Once again, there is no set method for conducting hearings on violations of the rules and regulations. Minimally, the owner should be afforded an opportunity to tell his or her side of the story to the board. The owner should also be allowed to present witnesses on his or her behalf. There is no requirement that the person who reported the violation be present at the hearing or that the owner be provided an opportunity to question the reporting witness. Once the owner has presented his or her side of the story, no further process is required prior to the board making its ruling. Please note that Section 18.5(c)(4) of the ICPA and Section 1-40(b)(5) of the CICAA allow the board to conduct hearings on violations of the rules and regulations in closed, executive session. If the board conducts the hearing in executive session, the board must re-convene to the open portion of the meeting for voting on the alleged violation and fine.

Following the board’s determination, a letter should be sent to the owner setting forth the ruling, what fine (if any) has been levied against the owner’s account and if a fine has been levied, the amount of time the owner has to pay the fine before it is considered late.

c. Fines.

As indicated by the discussion above, the ICPA and the CICAA provide associations with the ability to levy fines against owners who fail to abide by the rules and regulations. Any fines so levied will be added to and become part of the owner’s common expense account with the association. In order for fines to be considered valid and levied properly, the consequences for failing to abide by the rules and regulations must be specifically spelled out. Failure to put the owners on notice that a violation of the rules and regulations may result in a monetary fine could result in the association’s inability to collect the fine.

Courts are generally reluctant to award substantial amounts to associations as a result of owner violations of the rules or other governing documents. Therefore, while a board may think that a $500.00 fine will compel owners to clean up after their pets, in all likelihood, if the owner does not pay and the association takes the owner to court, the fine will not be upheld. Simply put, fines are acceptable, but the amount of the fine cannot be greatly disproportionate to the offense and damage to the association/owners resulting therefrom. Acceptable fine structures usually start with either a written warning or a small fine (i.e. $25.00) upon the finding of a first violation. From the first fine forward, the association may adopt a graduated scale of fines for subsequent violations (i.e. $50.00 for the second violation, $100.00 for the third violation and $100.00 for each such subsequent violation of the same rule). Should an owner fail to pay any fines properly levied, the association may pursue the unpaid fines as it would unpaid assessments. Most governing documents also allow an association to recover the attorney’s fees and court costs it incurs in pursuing such an action.